Mortgage Insurance Types: PMI, MIP, VA Funding Fee Explained

Mortgage insurance protects lenders when borrowers put less than 20% down. Conventional loans require PMI (0.5-1.5% annually, removable at 20% equity). FHA loans require MIP (1.75% upfront plus 0.55% annually, usually for the life of the loan). VA loans have a one-time funding fee (2.15% for first use) but no monthly insurance. Each type has different costs, duration and removal options.

Why Mortgage Insurance Exists

Mortgage insurance protects the lender, not you. When you put less than 20% down, you’re a higher risk borrower statistically. If you default, the lender may not recover their full investment when selling the property.

Mortgage insurance covers this risk, allowing lenders to approve loans with smaller down payments.

Key point: You pay for insurance that protects the lender. It provides no benefit to you except enabling a lower down payment.

PMI: Private Mortgage Insurance (Conventional Loans)

What Is PMI?

PMI is required on conventional loans when you put less than 20% down. It’s provided by private insurance companies (MGIC, Radian, Genworth, etc.).

PMI Costs

Your PMI rate depends on credit score and down payment:

Credit Score	5% Down	10% Down	15% Down
760+	0.30%	0.22%	0.19%
740-759	0.35%	0.26%	0.23%
720-739	0.45%	0.35%	0.28%
700-719	0.55%	0.45%	0.38%
680-699	0.70%	0.55%	0.45%
660-679	0.90%	0.75%	0.60%
640-659	1.05%	0.85%	0.70%
620-639	1.50%	1.25%	1.10%

Example: $350,000 loan, 5% down, 700 credit score

PMI rate: 0.55%
Annual cost: $1,925
Monthly cost: $160

PMI Payment Options

Monthly PMI: Most common. Added to your monthly payment. Easiest to cancel.

Single-premium (upfront): Pay entire premium at closing. Non-refundable but no monthly payment.

Split-premium: Part upfront, part monthly. Lower monthly payment than full monthly PMI.

Lender-paid (LPMI): Lender pays PMI, you pay higher interest rate. Cannot be removed.

Removing PMI

Automatic termination: Lender must cancel at 78% LTV based on original amortization schedule.

Request at 80% LTV: You can request cancellation when you reach 80% of original value. May require appraisal.

Early removal with appreciation: If your home appreciates and you reach 80% LTV based on new value, you can request removal (typically after 2 years).

Refinance: If you have 20%+ equity, refinance to a new loan without PMI.

PMI Tax Deductibility

The PMI deduction has expired and been renewed multiple times. Check current tax law. When available, it phases out at higher income levels.

MIP: Mortgage Insurance Premium (FHA Loans)

What Is MIP?

MIP is FHA’s version of mortgage insurance. It’s required on all FHA loans, regardless of down payment size.

MIP Structure

FHA MIP has two components:

Upfront MIP (UFMIP): 1.75% of loan amount, paid at closing or financed into loan

Annual MIP: 0.55% for most borrowers, paid monthly

MIP Costs Example

$300,000 FHA loan, 3.5% down:

Loan amount: $289,500
UFMIP: $289,500 × 1.75% = $5,066 (financed into loan)
New loan balance: $294,566
Annual MIP: $294,566 × 0.55% = $1,620/year
Monthly MIP: $135

MIP Duration

Loans with less than 10% down: MIP for life of loan

Loans with 10%+ down: MIP for 11 years

Key difference from PMI: For most FHA borrowers (who put less than 10% down), MIP never goes away unless you refinance to a conventional loan.

Escaping FHA MIP

Refinance to conventional: Once you have 20%+ equity and good credit (680+), refinance to conventional loan with no PMI.

Put 10% down: If you can put 10% down on FHA, MIP drops off after 11 years.

Wait for 20% equity, then refinance: Most common exit strategy.

VA Funding Fee

What Is the VA Funding Fee?

The VA funding fee is a one-time fee that helps fund the VA loan program. It replaces monthly mortgage insurance.

Funding Fee Rates (2024)

First-time VA loan use:

Down Payment	Regular Military	Reserves/Guard
0%	2.15%	2.40%
5-9.99%	1.50%	1.75%
10%+	1.25%	1.50%

Subsequent VA loan use:

Down Payment	All Borrowers
0%	3.30%
5-9.99%	1.50%
10%+	1.25%

Funding Fee Example

$320,000 VA loan, first use, zero down:

Funding fee: $320,000 × 2.15% = $6,880
Can be financed into loan
New loan balance: $326,880

Funding Fee Exemptions

You pay no funding fee if:

You receive VA disability compensation
You’re eligible for VA disability (claim pending)
You’re a surviving spouse of veteran who died in service
You’re a Purple Heart recipient on active duty

VA vs PMI Comparison

Feature	VA Funding Fee	Conventional PMI
When paid	Once at closing	Monthly
Amount	2.15% one-time	0.5-1.5% annually
Duration	One-time	Until 20% equity
Removable	N/A (already paid)	Yes
For whom	Veterans/military	Anyone

Over 5 years on $300,000 loan:

VA funding fee: $6,450 (one-time)
PMI at 0.7%: $10,500 ($175/month × 60)

VA is often cheaper, especially for borrowers with lower credit scores who’d pay higher PMI rates.

USDA Guarantee Fee

What Is the USDA Guarantee Fee?

USDA loans have their own insurance structure, similar to FHA.

USDA Fee Structure

Upfront guarantee fee: 1.0% of loan amount

Annual guarantee fee: 0.35% of remaining balance

USDA vs FHA Comparison

Feature	USDA	FHA
Upfront fee	1.0%	1.75%
Annual fee	0.35%	0.55%
Duration	Life of loan	Life (< 10% down)
Removal option	No	No

USDA fees are significantly lower than FHA fees.

USDA Fee Example

$250,000 USDA loan:

Upfront fee: $2,500 (financed)
New balance: $252,500
Annual fee: $252,500 × 0.35% = $884/year
Monthly fee: $74

Comparing All Mortgage Insurance Types

Cost Comparison ($300,000 Loan, 5% Down)

Loan Type	Upfront Cost	Monthly Cost	5-Year Total
Conventional (700 credit)	$0	$138	$8,280
Conventional (660 credit)	$0	$225	$13,500
FHA	$5,250	$135	$13,350
VA (first use)	$6,450	$0	$6,450
USDA	$3,000	$88	$8,280

Note: Conventional PMI may be removed earlier, changing the comparison.

Which Is Best?

Best for veterans: VA loan (low one-time fee, no monthly insurance)

Best for high credit (720+): Conventional (low PMI, removable)

Best for lower credit: FHA or USDA (if eligible) often cheaper than high PMI rates

Best for rural areas: USDA (lowest ongoing costs)

Strategies to Minimize Mortgage Insurance

Put 20% Down

Eliminates PMI entirely on conventional loans. Requires saving more but reduces monthly payment.

Piggyback Loan (80-10-10)

Take 80% first mortgage (no PMI) plus 10% second mortgage, put 10% down. Avoids PMI but adds second payment.

Choose VA or USDA If Eligible

Both have lower insurance costs than conventional with low down payment.

Improve Credit Before Buying

Higher credit = lower PMI rates. Improving from 660 to 720 can cut PMI nearly in half.

Lender-Paid PMI (With Caution)

Accept higher rate instead of monthly PMI. Good if you’ll refinance soon, bad if you keep the loan long-term.

Frequently Asked Questions

What’s the difference between PMI and MIP?

PMI is for conventional loans, provided by private companies, and can be removed at 20% equity. MIP is for FHA loans, paid to HUD, and typically lasts the life of the loan unless you put 10%+ down.

How do I get rid of mortgage insurance?

Conventional PMI: Request removal at 80% equity or wait for automatic removal at 78%. FHA MIP: Refinance to conventional once you have 20% equity. VA/USDA: No monthly insurance to remove.

Is mortgage insurance tax deductible?

It has been deductible in some years but the provision keeps expiring. Check current tax law or consult a tax professional.

Why do I have to pay for insurance that protects the lender?

It’s the cost of borrowing with a low down payment. Without mortgage insurance, lenders wouldn’t offer loans with less than 20% down. You’re essentially paying for the privilege of a smaller down payment.

Can I avoid mortgage insurance entirely?

Yes, by putting 20% down on a conventional loan, getting a VA loan (one-time fee only), or using a piggyback loan structure.

Which loan has the cheapest mortgage insurance?

VA loans typically have the lowest insurance cost (one-time fee, no monthly payment). USDA has the lowest annual rate (0.35%). Conventional can be cheapest for high-credit borrowers who remove PMI early.